EC on Ranking of Unsecured Debt Instruments in Insolvency Hierarchy

A number of member states have amended or are in the process of amending the rules on insolvency ranking of unsecured senior debt under their national insolvency law. The national rules adopted so far diverge significantly. The absence of harmonized EU rules creates uncertainty for issuing institutions and investors alike and is likely to make the application of the bail-in tool for cross-border institutions more difficult. Thus, in its resolution of March 10, 2016 on the Banking Union, the European Parliament called on the Commission to present proposals to reduce further the legal risks of claims under the no creditor worse off principle. Moreover, in its conclusions of June 17, 2016, the Council invited the Commission to put forward a proposal on a common approach to the bank creditors’ hierarchy to enhance legal certainty in the event of resolution. Consequently, this Directive harmonizes the ranking under normal insolvency proceedings of unsecured claims resulting from debt instruments and does not cover the insolvency ranking of deposits beyond the existing applicable provisions of Directive 2014/59/EU.

To reduce, to a minimum, the costs of compliance with the subordination requirement and any negative impact on funding costs, this Directive allows member states to keep, where applicable, the existing class of ordinary unsecured senior debt, which is less costly for institutions to issue than any other subordinated liabilities. To enhance the resolvability of institutions, this Directive should, nevertheless, require member states to create a new class of non-preferred senior debt that should rank in insolvency above own funds instruments and subordinated liabilities that do not qualify as own funds instruments, but below other senior liabilities. Institutions should remain free to issue debt in both the senior and the non-preferred senior classes. Of those two classes, and without prejudice to other options and exemptions provided for in the TLAC standard to comply with the subordination requirement, only the non-preferred senior class should be eligible to meet the subordination requirement. To ensure that the new non-preferred senior class of debt instruments meets the eligibility criteria as described in the TLAC standard and as set out in Directive 2014/59/EU, thereby enhancing legal certainty, member states should ensure that those debt instruments have an original contractual maturity of at least one year, do not contain embedded derivatives and are not derivatives themselves, and that the relevant contractual documentation related to their issuance and, where applicable, the prospectus explicitly refer to their lower ranking under normal insolvency proceedings.

Related Link: Directive (EU) 2017/2399

Effective Date: December 28, 2017

Keywords: Europe, EU, Banking, Resolution, Insolvency Hierarchy, Directive 2017/2399, EC